Durable Goods Orders Plunge in January - February 28, 2012

The Commerce Department gave investors something new to worry within the past hour, as that government agency reported that orders for durable goods, those long-lived products ranging from television sets and dishwashers to jet aircraft, had plunged by 4.0% in January. A decline of about 1% had been the consensus expectation. That surprising drop in this notoriously volatile series followed an upwardly revised gain of 3.2% in December. Initially, the December gain had been estimated at 3.0%.

Meanwhile, the pullback in these long-lasting goods last month was at the fastest pace in some three years. Demand fell in most categories, including a 19.0% plunge in civilian aircraft orders and a 10.4% drop in machinery orders. Prior to this latest setback, durable orders had risen for three months in a row, with respective gains of 4.2% and 3.2% in November and December, alone. Even more worrisome was the fact that a key barometer of capital spending by businesses fell back in January, when the government noted that orders for non-defense capital goods had plummeted by 6.3% in the latest month--the biggest setback in a year.

Now, of course, this report may be an outlier, as most other surveys, including those on housing, employment, and industrial activity, have been routinely positive over the past few months. That long uptrend has been a key component in Wall Street's rise during the past half year. Given this warning shot, however, it is now our sense that investors will be looking even more closely at upcoming data to detect whether this is the opening salvo in a succession of weaker reports. Our sense, for now, is that this report was an aberration.

All told, orders fell to $206.1 billion in January from $214.7 billion in December. Excluding transportation, orders fell by 3.2% last month; backing out defense, new orders for durable goods declined by 4.5%. Meantime, shipments rose nominally last month, following a more substantial increase in December.

As for the components in this report, the major contributors to the decline in orders last month were setbacks of note in manufacturing, primary metals, machinery, electrical equipment, and non-defense aircraft and parts. Exceptions were strong gains in defense capital goods and more modest increases in motor vehicles and parts and in communications equipment.

These exceptions aside, it was a most disappointing report and one that could give the economic bulls cause for possible concern, especially if this is not the exception to the rule going forward.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.